Featured Penny Stock: TX Holdings Inc.
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TX Holdings, Inc. (OTC Pink Sheets: TXHG)
July 13, 2006
TX Holdings, Inc. (OTC Pink Sheets: TXHG) is an emerging independent oil & gas companies, focusing on the acquisition and development of proven producing properties in Texas, Oklahoma, and Louisiana. The Company has completed acquisitions in Callahan County, Texas, the Williams and Parks leases, which contain estimated reserves of more than 36 million BOE. With the recent acquisition of a 75% net revenue interest in the Contract Area #1, a 247 acre leasehold in nearby Eastland County, the Company has added approximately 19 million BOE in additional reserves (with 7.2 million in proven reserves according to a recent reserve report and positioned itself for significant increases in revenue and production over the near-term period, Building upon its strategic relationship with local oil industry player Masada Oil & Gas, TX Holdings is quickly developing a substantial and growing portfolio of producing, low-risk domestic oil and gas plays, and is increasing shareholder value through it innovative position within the $3.75 trillion worldwide oil& gas market.
- The Company has rapidly built an impressive reserve position with a strong near-term production outlook. The Company is rapidly developing a portfolio of oil properties consisting of proven and producing reserves that are already brining oil out of the ground and capable of generating near-term revenues growth for the Company. Utilizing a careful screening process and working closely with operational partners, the Company has been able to mitigate risks and maximize potential rewards on an accelerated timeline. Within the immediate term-period, the Company anticipates that it will attain production of approximately 320-400 barrels per day.
- Contract Area #1 is a major acquisition for the Company which provides the addition of proven reserves. With a 60% working interest in this property, the Company has gained access to an estimated 19 million BOE in reserves, with 7.2 million proven, producing, and behind pipe. Based upon recompletion and re-working of existing wells on the property and additional work, the Company anticipates reaching production goals of approximately 2,900 BOE per day within two years.
- TX Holdings is well positioned in an oil & gas industry facing increased worldwide energy demands projected over the near and long term- a situation that bodes well for E&P (Exploration & Production) companies. The US energy crunch (with oil prices at the pump reaching new highs almost daily), and the tenuous international production climate has created an advantageous investment climate for North American E&P companies.
- On a potential valuation level, and relative to the average trading range of a peer grouping of small and micro-cap oil & gas companies, TX Holdings appears to be priced at a significant discount. By applying this grouping’s median market price to reserve multiple to the Company’s current reserve estimates and probability of proven reserves, we can arrive at an implied valuation for TX Holdings of approximately $10.00 per share.
TX Holdings, Inc. (OTC Pink Sheets: TXHG), founded in 2004, is an emerging independent oil & gas company. Led by a seasoned management team experienced in petroleum industry operations and acquisitions, the Company seeks to acquire and develop a diversified portfolio of low-risk oil & gas properties that can provide near-term revenues and excellent return on capital investment. The Company intends to utilize advanced technologies in order to identify and re-examine properties that are no longer thought to be profitable and to develop new ways to produce more oil and natural gas from properties that were overlooked by predecessors. TX Holdings will employ a multi-tiered business strategy that includes: focus on projects that have near term economic impact; an emphasis on production and enhancement activities; developing reserves through the drilling of a balanced risk/reward portfolio; focusing on select geographic areas; balancing efforts among exploration of new properties and the development and reworking of proved properties; controlling operations and costs; and utilizing advanced technologies to minimize exploration risks. TX Holdings intends to develop a balanced and impressive portfolio of oil and gas properties in Texas, Louisiana, and Oklahoma which present strong potential for successful production over the near-term period with minimal capital investment and mitigated risk. The Company is capitalizing on both of the major trends in domestic oil and gas E&P efforts, carefully selecting and screening properties for maximum potential of overlooked and bypassed production opportunities, and utilizing advanced exploration technologies to mitigate risks.
The Company has already acquired its first producing property with the highly promising Parks Lease in Callahan County, Texas, where independent geologists and petroleum engineers have estimated potential reserves of 12-13 million BOE in this 320 acre property with 22 existing wells onsite. This project has been carefully selected and screened, and TX Holdings has developed a conservative operational plan to begin commercial production and delivery of crude oil within a four-month time frame. The Company has also acquired an adjacent property, the Williams Leases, which contain an estimated 24 million barrels of recoverable reserves, all from shallow depths of less than 1,000 feet. With these projects in place, TX Holdings intends to pursue further development of these properties and to acquire additional leasehold prospects pursuant to the following criteria:
- Wells must be currently producing
- Production must be broadly distributed across lease
- Lease must show circa 24 month payback
- Wells must contain upside potential (undeveloped or PUDs on the order of 20%)
Future oil and gas projects acquired and developed by the Company will fall into three principal categories:
- Proven producing reserves where additional development opportunities exist.
- Fields with demonstrated prior production where significant reserves where bypassed due to outdated operational or completion methods used by the prior operator.
- Exploratory projects with “world class” potential where extensive geophysical and scientific data and analysis can help to mitigate the high risks generally associated with “wildcat” exploration.
Integral to TX Holdings’ position as an innovative, technology oriented oil and gas exploration and production company with a balanced portfolio of properties with near-term production potential is its strategic relationship with Masada Oil and Gas, Ltd., a highly successful operator in central Texas with more than 100,000 acres of lease holdings containing an estimated 1 billion barrels of oil and 3.2 billion cubic feet of gas in reserves. Masada has developed proprietary technologies for secondary and tertiary oil recovery (also known as EOR, or enhanced oil recovery) utilizing advanced techniques that can increase yields by more than 15%. Under terms of TX Holdings’ agreement with Masada, Masada will operate TX Holdings’ on a contractual basis, ensuring streamlined and effective operations while minimizing costs. In future acquisitions, TX Holdings intends to utilize either this specific relationship, or establish similar partnerships along the same principles, to maximize its resources and enable it to improve ROI. This type of partnership is a cornerstone of the Company’s innovative strategy of minimizing risk and capital outlay through concentrating on its strengths in structuring acquisitions and managing financial relationships, while still maintaining some of the most advanced and diverse E&P operations in the domestic market. With a focus on acquiring producing leaseholds which contain significant overlooked or bypassed reserves and the use of advanced production technologies, TX Holdings is positioned to capitalize on North American E&P trends. This strategy has been successfully employed by a number of start-up and junior oil players, and has been a contributing factor in the overall sector’s stellar investment performance over the last several years.
To facilitate its planned acquisition strategy, the Company is currently undertaking an equity round of $1.0 million through a private placement offering with proceeds to be used for the development and reworking of the Williams Leases and Parks Lease to achieve commercial production levels within the next 3-6 months. Initial development of these projects, in concert with additional financing as required, will provide the capital for further development of existing properties as well as fund the acquisition and development of new and producing leaseholds. The Company is currently examining a number of potential acquisition candidates to facilitate its next round of growth.
The Williams Leases - TX Holding’s principal oil & gas property is the Williams Leases, covering 843 acres of proven producing oil and gas properties in Callahan County, Texas. An option was acquired by the Company in May of 2006; this prospect is located on a 22 mile long development trend with multiple zones of hydrocarbon production that have been developed since the 1920’s. This trend contains 1 to 14 production zones from the surface to approximately 4,500’ in depth. The vast majority of estimated reserves, some 24 million BOE is contained in shallow zones of less than 1,000’, assuming a recovery factor of 35%. There are currently 32 wells on the property, constituting 28 wells with depths of less than 500’ and another 5 deep wells from 1,800’ – 4,500’. The Company holds a 72.5% net revenue interest in production from these leases. Currently, the Company has hired geologists and reserve engineers to validate initial estimates. TX Holdings plans to begin reworking, recompletion, and restimulation of existing wells on the property within the next 30 days, and through these efforts anticipates attaining commercial production within fiscal 2006.
Parks Lease - Acquired in April of 2006, the Parks Lease is 320 acres with approximately 22 existing wells located adjacent to the Williams Leases of the Company in Callahan County, Texas. This leasehold contains estimated net reserves of approximately 12 million BOE (proven an unproven), with a recovery rate of 40%. TX Holdings has a 75% working interest in the Parks Lease, indicating a net of 8 million barrels of lifetime production to the Company from this property. At current prices on the spot market, this would equate to approximately $564 million in net revenues to TX Holdings over the site’s production history. This lease is additionally a producing property with minimal production of non-commercial levels at present. Upon completion of its planned private placement offering, TX Holdings intends to dramatically ramp up production at this property.
Contract Area #1 - is the most recent acquisition of the Company, completed on June 28, 2006. Consisting of four leases (Roy Adams, W. Isenhower, Isenhower, and Isenhower Estate “C”), Contract Area #1 is approximately 247 acres in size with 36 wells currently on the property and estimated reserves of approximately 19 million barrels. Wells on the property have been successfully drilled and producing since the 1950’s. A recent reserve report by Cesar Orosco, American Association of Petroleum Geologists, showed that the leases have pay zones in five areas under 1000’, with estimated reserves of 7.2 million barrels proved and behind-pipe.
The outlook for North American oil and gas exploration is extremely positive from an investment perspective, with increasing US energy demands projected over the near and long term sustaining major gains for oil and gas producers. The US is in the midst of an unprecedented energy crisis, threatening the financial security of the country and directly impacting consumers at the gas pump and the electric meter. It should not be news to learn that US oil production is now at its lowest levels since the 1950’s- and demand continues to rise at an unprecedented rate. Oil is sill the engine of world economic growth, and global demand is soaring. Driven by worldwide economic growth and a vibrant Chinese economy with a voracious appetite for crude, global oil demand has been growing at an annual rate of 2.5%-3.5%. Since 1970, oil demand has exploded from 47 million barrels per day to 81 million bpd in 2004. By 2010, total global demand for oil is expected to rise by an additional 20 million bpd. US demand is no less insatiable with annual consumption of more than 7.5 billion barrels.
In the US in particular, the shortfall of existing crude supplies to meet demand is particularly acute. US oil production is slowly dwindling with an annual decline of over 2%. Currently, US production is at its lowest levels since the 1950’s and reserves are rapidly being depleted. This has resulted in a growing and troubling reliance on foreign oil imports. Today, imports account for roughly 57% of total US oil usage- by 2020 the figure will be 79%!!! This dependence on imported oil is exacerbated by the growing uncertainty over foreign oil supplies, with Mid East military and political chaos, political instability in Venezuela, and OPEC production caps. Today, crude oil prices on the spot market are above the $70 per barrel, an increase of over 35% within the last year, and 328% since 2002. Many analysts are predicting that prices could reach as high as $100 in the foreseeable future. This supply shortfall and price outlook belies a simple and undeniable fact, that the US energy supply will prove increasingly tenuous unless out additional and vigorous exploration and production efforts are undertaken.
The supply-demand conundrum is no less pronounced with natural gas over the long term. While natural gas on the spot market are currently more than double three years ago at about $6 per million British thermal units (Btu), and in the wake of Hurricane Katrina prices on the spot market rose to a historic high of more than $15 per Btu, eclipsing the then-record highs of $10 per million Btu during late 2000/ early 2001.. According to the US Energy Information Administration (EIA) the US demand for refined petroleum products will grow by over 35 percent in the next two decades, increasing from 18.0 million barrels per day in 1996 to over 24.6 million barrels per day by 2020 -- a 35% increase. The growth of domestic demand for natural gas, driven by expanding natural gas-fired electric generation plants, will be even more pronounced skyrocketing from current levels of roughly 23 trillion cubic feet (Tcf) to 32-37 Tcf by 2020. Natural gas-fired power plants are the largest source of electric generation capacity in the US, and are critical to economic growth and development. According to Robert Christensen Managing Director and Energy Analyst for First Albany Corporation, “to effect a 1% change in the GDP requires a .8% increase in electricity. Importing natural gas is an expensive and technically complex process, requiring conversion and shipping of natural gas in LNG (liquefied natural gas) form (with only 17 production and export terminals worldwide), and only meets a fraction of US requirements, meaning that gas must be either produced domestically or imported via pipeline (primarily from Canada). The US EIA predicts that Canadian natural gas, which currently constitutes 80% of aggregate imports, will fall from 3.0 trillion cubic feet in 2005 to 2.5 trillion cubic feet in 2009. In the face of rising demand and imports insufficient to meet this gap, it is estimated that more than 450 to 55 trillion feet of reserves must be discovered over the next 10 years to meet anticipated demand, with potential costs of exploration and production topping $1.5 trillion over this period.
For the petroleum industry, this renewed impetus on domestic exploration and production has led to several new developments that improve the likelihood of exploration success and the location of new reserves. Many of the technologies associated with oil and gas exploration have been significantly enhanced over the last several years, and the refinement of techniques such as three dimensional seismic imaging have made oil exploration far more efficient, increasing the accuracy of modeling and decreasing the chances of missing oil. The second way that oil exploration is becoming more efficient is the increased practice of reexamining wells that were no longer thought to be profitable. Many wells through the 1970’s were extracted only using primary production techniques and then prematurely abandoned when production became more expensive and problematic, leaving significant quantities of oil and natural gas. It has been estimated that many of these early producing fields can contain as much as 50-60% of recoverable production. A number of junior oil & gas companies have enjoyed huge successes through employing strategies that focus on locating and reworking overlooking and bypassed production properties.
Management & Board of Directors
- Mark S. Neuhaus, Chairman & President, has an extensive and varied executive and entrepreneurial career spanning more than 2 decades, specializing in corporate finance and start-up situations. Mr. Neuhaus has been the founder of several start-up companies, including Solar Electric Engineering which later became US Electric Car, a public corporation that he built to a market capitalization of more than $300 million. He was also one of the founding shareholders of Interactive Motorsports and Entertainment, which trades on the over-the-counter bulletin board exchange. As well as managing the daily activities of TX Holdings, Mr. Neuhaus manages several funds specializing in financing small capitalization companies. In addition to his entrepreneurial career, Mr. Neuhaus is also a professional race car driver who has driven for the Dick Barbour Porsche and Saleen/Konrad teams.
- Michael Cederstrom, Interim Chief Financial Officer, has been practicing law for the past twenty five years and has been serving as Chief Financial Officers to various corporations since 1997. After earning his MBA degree with honors and a JD from Southwestern University, worked in business law for thirteen years as a partner at Patronite & Cederstrom, specializing in corporate law. During this time, he participated in the organization of a bank and the registration of its shares on the NYSE, and served on the Board of Directors of two banks and several other businesses. He has served as General Counsel and CFO for a privately held clean energy holding company and for a Canadian-based oil & gas E&P company. Over the past decade he has also handled Public and Secondary Offerings raising more than $30 million.
- Bobby Fellers, Director, is an experienced hand in the oil and gas industry, with 26 years spent working in the US and offshore field operations. Currently Mr. Fellers is the Principal of The Masada Family of Companies, which include Masada Oil & Gas Company, Ltd., Masada Energy LLC, Masada Star, LLC, Diamond S Masada LLC and Crude Production Company. At Masada he primarily serves as the organization and oversight manager, with the current primary focus on the acquisition and development of oil properties in Texas. Mr. Fellers is responsible for the management of oil & gas companies, with major landholdings in central Texas encompassing 4,002 acres with 213 existing wells, with reserves in excess of 165 million BOE and 3.2 billion cubic ft. of gas. He will play an extensive role in the evaluation and acquisition of new properties and leaseholds, and has been instrumental in the Williams and Parks leases acquisitions.
- Douglas Hewitt, Director, is an experienced energy and technology industry executive with more than 18 years of experience, including tenures as CEO of several public companies. Currently Mr. Hewitt is the CEO of Hewitt Energy Group, a privately held oil & gas exploration and production company. Prior to this, Mr. Hewitt founded several successful oil and gas firms, including The Luxol Energy Group, HEGCO Canada, Inc. and oil-field services company Nemaha Services. From 1986-1988, he was President of New Century Petroleum, a private E&P company with operations in Kansas and Oklahoma.
There are a number of specific investment risks to consider both company and industry specific, as TX Holdings, Inc. moves forward with an aggressive acquisition strategy and seeks to develop existing leaseholds, including:
- Capitalization- is a significant investment concern, only partially offset by the recent announcement that the Company has broken escrow on its $1.0 million private placement offering. Over the intermediate term, in order to facilitate planned future acquisitions, the Company will require additional financing through a debt or equity round.
- Oil and gas reserve estimate uncertainty- the potential economics of oil & gas leases, including those validated by reservoir engineering studies, remain inherently uncertain, and especially given the need for such studies on several of the Company’s initial leaseholds could actually be far less than anticipated.
- Oil and gas price volatility- is of particular concern. The economics of the Company’s planned acquisition strategy and redevelopment/reworking of producing properties is predicated upon the maintenance of relatively high oil and gas process. However, as has been recently implied by several industry figures, it is entirely possible that current pricing levels are the result of irrational market concerns rather than supply-demand equations. This possibility is mitigated by the fact that even the most conservative industry price forecasts are rarely lower than $50-55/BOE, a level at which TX Holdings’ strategies are extremely attainable and cost effective.
- Dependence on key personnel and strategic partners-, most notably of Chairman Mark Neuhaus and Masada Oil & Gas, in the initial stages of the Company development should present a cautionary note. The loss of several key members of the management abd board could adversely impact the Company, as could a diminished relationship with Masada, the Company’s operating partner in each of its i9nital projects.
- Management team- the Company faces a weakness in its CFO and COO positions at present. While the interim CFO position is being ably filled and the Company is searching for a full-time replacement candidate, the absence of experienced oil and gas industry veteran in the COO position is a situation that will need to be addressed.
- Industry concerns- oil and gas exploration & production is an inherently risk endeavor, which can be adversely affected by a number of external factors, including natural disasters, macro-economic conditions, and environmental and regulatory issues.
Potential Valuation Analysis
There are a number of inherent difficulties in projecting the potential future market valuation of an emerging oil & gas company, especially one in such an early stage of pre-commercial production development. This task is additionally hindered by the reserve status of the Company’s lease holdings, which have yet to be validated (with the exception of Contract Area #1) through an SEC approved reserve engineering report. Typically, small and micro-cap oil & gas companies are valued in terms of proven reserves complying with SEC definition of proven producing properties. An analysis of comparable companies provides a benchmark valuation of approximately 21x proven reserves among the peer grouping.
To understand potential application of this valuation method to TX Holdings at this stage requires a great deal of inference and speculation. We believe it is reasonable to assume that the Company’s aggregate proven developed reserves from existing properties could conservatively reach 10-11 million BOE, once appropriate studies have been concluded. We have developed this estimate from the following assumptions:
- 75% net working interest in properties in reserves from Parks and Williams Leases (with proven reserves estimated at 25% of total estimate-6.5 million BOE)
- 60% net interest of 7.2 million BOE of proven reserves in Contract Area #1 (4.3 million BOE)
Using this rough reserve calculation of 10.8 million barrels for the Company, and comparing it to the peer grouping of small and microcap oil & gas companies average market capitalization to reserve ration, we can therefore arrive at an implied valuation of approximately
Under these criteria, and following completion of the private placement round, we can therefore arrive at an implied valuation for the Company of approximately $226 million, or $10 per share for TX Holdings, Inc.
*Notes to Peer Grouping Comparative Valuation- It is important to note the critical distinction between proven reserves, as defined by the Securities and Exchange Commission and used as a valuation benchmark for the peer grouping, and estimated reserves as utilized for our calculation of TX Holdings’ potential market valuation. This requires certification through an established reserve estimation process updated on a regular basis. Over the near-term period, the Company plans to conduct reserve estimates on all of its leaseholds.
Safe Harbor & Disclaimer: Proteus Equity Research is written and produced as an information source only. We are not a broker dealer, and this is not to be construed as a solicitation to buy or sell securities. Certain statements in the report pertaining to the Company’s earnings, development, and future growth potential are considered “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as defined in the Private Securities Legislation Reform Act of 1995. Proteus Equity Research intends that such statements about a company’s future expectations, including future revenues and earnings, and all other forward looking statements be subject to the safe harbors created thereby. Because such statements are subject to risks and uncertainties, actual results may differ significantly from those expressed or implied by such forward-looking statements. The information contained in this report has been carefully complied from sources deemed to be reliably, but we do not guarantee that it is accurate or complete, and it should not be relied upon as such. Opinions expressed are current opinions as of the date appearing on this material only. While we endeavor to update material on a reasonable basis, we are not obligated to do so and there may be regulatory, compliance or other reasons that prevent us from doing so. This report may not be construed as investment advice. Investing in securities is speculative and carries a high degree of risk. Past performance does not guarantee future results. All information contained in this report should be independently verified. Investors are reminded to perform their own due diligence with respect to any investment decision. Independently investigate and understand all risks before making any investment. Proteus Equity Research and/or its officers and employees have been compensated $5,000 by a third party for work involved in the preparation and production of this report. Officers, directors, and employees of Proteus Equity Research, including persons involved in the preparation or issuance of this material do not hold an equity position in the aforementioned securities at this time. Per Share Data reflects current or otherwise indicated share numbers and could be affected by actual future share dilutions. Prices of securities and price to financial ratios are for recent data and may vary based on the day the data was obtained for individual companies. Some or all of the Securities discussed herein may be speculative in nature and thus readers of this material are advised to CONDUCT DUE DILIGENCE BEFORE PURCHASING ANY SECURITY.
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